Risk Update

Risk Reading — Analyzing Conflicts Disclosures (or Not), Alleged Trade Secret Stealing COO Suit Nears Settlement, Auditor Liability Expansion Analyzed,

Exclusive-Law firm tied to bankruptcy judge resignation did not make conflict disclosures -data analysis” —

  • “A Texas law firm did not follow standard disclosure practices in at least 27 cases that might have revealed its former partner was secretly in a romantic relationship with U.S. Bankruptcy Judge David Jones while the firm was appearing before him, a data analysis by Reuters has found.”
  • “Jackson Walker, a firm with nearly 500 lawyers and deep roots in the state, failed to disclose in court filings in major bankruptcy cases including oilfield services company McDermott International whether it had checked for connections between its attorneys and any judges on the Houston court, according to a review of the docket.”
  • “Court records show Jones approved millions of dollars in fees for Jackson Walker, the leading local counsel firm for corporate debtors filing for bankruptcy in Houston since 2019, according to Bankruptcydata.com. Freeman became a partner in 2018.”
  • “Jackson Walker said in a statement following Jones’ public acknowledgement that it first learned in March 2021 of an allegation of a romantic relationship between the judge and Freeman, who joined the firm after six years working as a clerk for Jones.”
  • “Jackson Walker said it investigated the allegation and consulted with outside ethics experts, and instructed Freeman not to work or bill on any cases before Jones. It did not identify the ethics experts it consulted or say what it learned from the investigation.”
  • “Law firms and other professionals employed by debtors are required under a bankruptcy rule to publicly list potential connections so that judges and other parties in the bankruptcy can assess if there might conflicts of interest.”
  • “The rule does not mention judges specifically; it refers to debtors, creditors and ‘parties in interest.’ But disclosing connections to judges appears to be a standard practice. In the court filings Reuters reviewed, the larger national law firms that worked for the debtor alongside Jackson Walker always indicated that they had searched for connections to the judges on the bankruptcy court.”
  • “Reuters reviewed Jackson Walker’s initial applications to represent debtors with at least $1 billion in debt that were filed in Houston since 2018 to the present. The list was compiled by Debtwire.”
  • “Jackson Walker filed applications in 30 such cases in Houston during the period, according to the Reuters analysis of court records. In only three applications did it file papers indicating that it had searched for connections to judges, and the firm said it had found none. It was not immediately clear why Jackson Walker searched for connections to judges in these three cases and apparently not the others.”
  • “If Jackson Walker lawyers knew of the relationship between Jones and Freeman but failed to report the connection in cases the firm was involved in, they may face accusations of having violated bankruptcy disclosure rules, eight legal experts said. Such violations can result in disgorgement of fees or even, in rare cases, criminal prosecution, they said.”
  • “In addition, there could be violations of rules of professional conduct, which require lawyers to report to the state bar association if they became aware of another lawyer whose conduct raises a substantial question about their honesty, the experts said. Violations of the rules could lead to a loss of a license to practice.”
  • “These reports are rare, as are findings of violations, the experts said.”

Proskauer Nearing Settlement with Ex-COO in Trade Secrets Suit” —

  • “Proskauer Rose is close to reaching a settlement with a former executive it accused of stealing a huge swath of records relating to its finances and business strategy before leaving the firm.”
  • “Proskauer and Jonathan O’Brien, the firm’s ex-chief operating officer, are ‘optimistic’ they can finalize a settlement agreement within 30 days, according to a letter submitted Tuesday by O’Brien’s counsel, Russell Beck. Beck asked the court to pause proceedings in the matter until Dec. 3.”
  • “The letter arrives nearly a year after Proskauer sued O’Brien in New York’s Southern District alleging he pilfered electronic files related to the firm’s finances, strategy and billing rates before abruptly resigning last December. The firm claimed O’Brien planned to use the files for a then-planned role at rival Paul Hastings, though the latter firm said in January O’Brien would not be joining.”
  • “O’Brien has denied allegations of stealing, claiming he had copied the firm’s confidential information on two hard drives to work on issues relating to his exit while on vacation on a remote tropical island in the Indian Ocean.”
  • [Previously on this]

Three lawyers at Kramer Levine say: “Proposed Expansion of Auditor Liability Would Be Ill-Advised” —

  • “A proposed negligence standard that would expand the liability of accountants for contributing to rule violations is unreasonable given the growing complexity of audits, say Kramer Levin’s Michael Dell, Daniel Ketani, and Samantha Alman.”
  • “The Public Company Accounting Oversight Board’s proposed revisions in September to its Rule 3502 significantly expand its authority to impose liability on accountants for contributing to a violation of PCAOB rules, securities laws, or professional standards. The board shouldn’t make these changes. The deadline for comments on the proposal is Nov. 3.”
  • “Rule 3502 prohibits people associated with registered public accounting firms from taking or omitting an action while ‘knowing, or recklessly not knowing, that the act or omission would directly and substantially contribute to a violation.’ This means the PCAOB must establish scienter—at a minimum, an ‘extreme departure from the standard of ordinary care for auditors’ in the face of a known or obvious risk.”
  • “The board wants to replace this with a negligence standard, under which an associated person could be fined and prohibited from associating with a registered public accounting firm for an ‘act or omission that the person knew or should have known would contribute’ to a primary violation. The accountant’s intent wouldn’t matter.”
  • “The PCAOB acknowledges its proposal nearly mirrors the original version of Rule 3502 it proposed in 2004. Back then, the PCAOB changed its mind, instead deciding a scienter requirement ‘strikes the right balance.’ Now it suggests that developments in the law and the auditing profession in the past two decades warrant expanding its authority to discipline auditors.”
  • “That logic is flawed. First, its proposed changes to Rule 3502 stand on shaky legal ground. The Sarbanes-Oxley Act of 2002, which created the PCAOB, doesn’t mention what the PCAOB calls ‘contributory liability.’ Section 105(c)(6) of the act creates secondary liability for certain supervisors of associated persons who commit violations, but it includes requirements and a safe harbor that are absent from Rule 3502.”
  • “Chair Erica Williams observed in September that the Securities and Exchange Commission is able to ‘seek civil money penalties in enforcement actions against associated persons when they negligently cause firm violations.’ But Congress extended that authority to the SEC, not the PCAOB. And while the SEC can discipline accountants for ‘improper professional conduct’ that contributes to a violation of professional standards, the bar is much higher than what the PCAOB has proposed: The SEC must prove that the accountant engaged in ‘intentional or knowing conduct,’ ‘highly unreasonable conduct,’ or ‘repeated instances of unreasonable conduct.’”